Several bond fund managers are likely to have been hit by the mobile phone retailer Phones 4U falling into administration.
The company owed roughly £760m to creditors, including bond funds, when mobile network operator EE withdrew its support last week.
After similar moves by Vodafone and O2 in recent months, EE’s decision left it with no mobile network partners.
Phones 4U’s bonds were trading above the par level of £1 on August 29 but plummeted to just above 30p after Vodafone’s announcement on September 1.
EE’s move saw the bonds hit a closing low of 19p on September 15, although at the time of writing they had recovered to nearly 30p in the pound.
The Royal London Global High Yield Bond fund, run by Azhar Hussain, held a 1 per cent position in the company.
Newton’s Parmeshwar Chadha had a 1 per cent position at the end of May, according to data from Morningstar. However, the group declined to confirm whether he still had exposure in his Global High Yield Bond fund. The duo, however, sold out entirely on September 1 after Vodafone pulled its business, stating the “surprise decision impacted the outlook materially”.
Kieran Roane and John Stopford had a 2.2 per cent position in the April 2018 bond as at the end of August in their Investec Monthly High Income fund.
Paul Reed and Mark Sanders, who run the Marlborough High Yield Fixed Interest fund, sold their entire 1.6 per cent position in the April 2018 bond on September 1.
Ben Pakenham, fixed income fund manager at Aberdeen Asset Management, said he had a 1 per cent position across his funds but that this was divested on the back of the “very significant negative” of Vodafone’s decision. “That fundamentally completely changed the company,” he added.
“This is a business which is very dependent on having choice for the high street shopper and after Vodafone, they were left with just EE. The very best case was that this gave EE lots of leverage over the business and the worst case is that which has transpired.”
Mr Pakenham said he started selling out of the bonds at 80p in the pound, a price much higher than that which would have been available last week.
The manager said he was “happy” with his decision to sell. Having considering buying back in when the bonds were trading at high single digits, “we were too slow to pull the trigger”, he admitted.
Rescue bid looks like a long shot
A last-ditch attempt has been made to save Phones 4U and its workforce of nearly 5,600 after EE – the last of its mobile operator partners – deserted it.
Louise Verrill, partner at law firm Brown Rudnick, who is acting for a large group of senior secured bondholders in Phones 4U Finance, said those it represents have been “working hard to ensure that the company’s cost structure can be adjusted to meet the commercial terms that EE and Vodafone put to the previous owners”.
She added: “We have proposed a restructure of the business that means the capital structure will no longer be an impediment to achieving the commercial outcome which allows the company to continue as a going concern.
“The bondholders would take a significant writedown on their debt, which would make the business commercially viable and lay foundations for the 5,596 jobs to be saved. We are in dialogue with Ian Green of PwC, one of the joint administrators, and look forward to collective meaningful engagement with Vodafone and EE to save the jobs and maximise returns to creditors and other stakeholders.”
Even if this deal is successful, the prospect of making any initial investments back in full seems to be a long shot, according to ratings agency Standard & Poor’s, which told the Financial Times it expected only 10-30 per cent of the largest tranche of secure debt would be returned to investors.
Aberdeen’s Ben Pakenham said senior bondholders had a better prospect of receiving some money back, particularly compared to investors who hold payment-in-kind bonds, which he said have “loose covenants”. These so-called PIK bonds pay the holder with more bonds, rather than cash, so investors in these are unlikely to be repaid in full.
